The AAT has ruled that a taxpayer that owns and manages a number of retirement villages was entitled to a deduction for payments which it was contractually required to make to “outgoing residents” comprised of a percentage of a resident’s “incoming contribution” and any difference between that incoming contribution and that of the next resident’s incoming contribution. In doing so, the AAT dismissed the Commissioner’s argument that the payments, totalling some $2.5m over a 4 year period, were not incurred in gaining or producing its assessable income or were of a non-deductible capital nature (especially as they were debited to the taxpayer’s “asset revaluation reserve”).

However, in finding that the payments were deductible under s 8-1 of the ITAA 1997, the AAT emphasised that the payments were “part and parcel of the carrying on of the business of operating the retirement village” particularly taking into account the manner in which the business was operated. In this regard, the AAT noted that occupancies of the various residential units were turned over on a regular basis (approximately 130 units every 7 years – being approximately 50% of the available units in the village). In short, the AAT found “the payments were merely part of the ebb and flow of the normal operation of the business”.

In regard to the Commissioner’s claim that the payments were of a non-deductible capital nature because of, among other things, the way they were treated by the taxpayer from an accounting point of view, the AAT noted whilst accounting practice may be relevant to the determination of tax issues at a broad level, “accounting and tax can and do differ” – and that this was an instance in which they did.

(AAT Case [2013] AATA 887, Re Retirement Village Operator and FCT, AAT, Ref Nos 2012/5734-5737, Deutsch DP, 13 December 2013.)

[LTN 243, 16/12/13]

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